Fears of $8 billion IMF bill for Australia

The International Monetary Fund could ask Australia to contribute as much as $US8 billion to a new $US500 billion raising to help ­protect “innocent bystanders" from the euro zone crisis.

The federal government said ­yesterday it was ready to increase Australia’s exposure to the IMF, but the US and many developing countries are refusing, insisting the euro zone puts more of its own cash on the line.

With the world economy likely to grow at its slowest pace since the global financial crisis in 2009 and the risk of a euro zone collapse ever closer, IMF managing director
Christine Lagarde
said in a statement yesterday that at a meeting this week many members of the IMF board had “stressed the necessity and urgency of collective efforts to contain the debt crisis in the euro area and protect economies around the world".

An IMF spokesman later said the IMF was “exploring options on funding". He said staff estimates suggested about $US1 trillion was needed to manage a potential crisis but the IMF says it is about $US500 billion short. The European Union offered last month to chip in up to $US150 billion to $US200 billion of that figure.

But non-euro zone EU countries such as Britain are reluctant and yesterday the US Treasury ruled out any funding. This leaves Asian and developing countries and Australia to make available another $US300 billion or $350 billion.

Patrick De Fontenay, adjunct professor at the ANU Crawford School of Economics and Government, and a former director of the IMF Institute, said it was in Australia’s interest to contribute but that if the US and the poorer developing countries refused, Australia might have to contribute a share of that $US300 billion equal to double its normal quota of 1.3 per ent. That would be about $US8 billion.

Prime Minister
Julia Gillard
backed the IMF’s push for more cash at the G-20 summit in Cannes last November, and acting Treasurer
Bill Shorten
indicated this was still government policy. “We need to ensure organisations like the IMF are properly resourced", he said. “Australia will, of course, play its part."

But shadow treasurer
Joe Hockey
said that if Australia received a formal request from the IMF the government should explain to the Australian ­people “whether it’s in the national interest and how it would intend to fund such a commitment".

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Australia currently has an exposure of about $11.3 billion to the IMF, but, Deloitte Access Economics director Chris Richardson, who worked at the IMF in the early ’90s, said the fund usually drew down only a small portion of the total credit lines available to it so Australia would probably not have to borrow the full amount it pledged.

He said the IMF had always been repaid and it paid a financial return on money borrowed. “This will not be a cost to Australia. It is a financial investment," Mr Richardson said.

IMF first deputy managing director David Lipton made a pitch for more cash to Asian countries at a speech in Hong Kong this week, arguing that the funding would be spent much more widely than in Europe.

“The goal is to be able to augment the resources Europe will be putting into tackling its problems, but also to be able to meet the needs of ‘innocent bystanders’ around the world. In a ­globalised world, the need for firewalls is global," Mr Lipton said.

Edwin Truman, a former senior US treasury official and now a research fellow at the Petersen Institute for International Economics, said in a phone interview from Washington, that he thought increasing the IMF’s resources was a good idea but was sceptical that the IMF could raise the money, and if it failed that could undermine confidence.

“That conveys the message that the fund is underfinanced. That does not promote confidence in the fund and in the system as a whole," Mr Truman said. He said the US was reluctant to pledge money during an election year although it had led the last effort to boost IMF funds during the first round of the global financial crisis in 2008 and ’09.

He said Asian countries were likely to push for more control of the IMF in exchange for any extra funding, but the IMF was yet to implement a deal struck by the G-20 in 2010 which would reduce the European representation on the 24-member IMF board by two.